Larry Summers

Herewith some thoughts about the outlook for this year. Thoughts, not forecasts, for which I have neither the skill nor the courage. I offer these thoughts in deference to the understandable demand for look-aheads. Human beings are always hunting for certainty, attempting to reduce randomness, surrendering to what Harvard’s Walter Friedman in his new book (Fortune Tellers: The Story of America’s First Economic Forecasters) calls “the near universal compulsion to avoid ambiguity and doubt.” But there is more to the demand for forecasts than this desire for certainty. Businessmen and policymakers want to use forecasts to change the future, to adapt products to predictions of changes in consumer taste, to structure finances so as to take advantage of predicted changes in interest rates and thereby change earnings in the coming year, to obtain “the ability to alter the very thing that one predicts,” to borrow from Friedman. In short, it is often the goal of the purchaser of a forecast to act so as to prove his seer wrong, and then hire him the following year to repeat the process.

Recent data suggest that 2014 will be a better year than 2013, at least so far as the economy is concerned. Yet more than 60 percent of Americans think the country is on the wrong track, that things will get worse in this new year. One possible explanation for this divergence is that the wisdom of crowds is not all it is cracked up to be. Another is that the cheery data are gossamer, to be blown away by the gusts emanating from the Federal Reserve Board’s announced tightening of monetary policy, its beaching of QE3. A third is that the data correctly portend better times, but the majority of Americans who argue that we are on the wrong track do not expect to benefit, at least not sufficiently to feel as if they are benefitting. Increased economic growth cannot convince the 1.3 million recipients of emergency unemployment benefits who will be losing about $300 per week unless congress acts, or the millions of middle class families suddenly afflicted with the higher health insurance premiums imposed by Obamacare, that the country is on the right track. Even beneficiaries of an improvement in their own economic circumstances, but among the majority of Americans who say their president is neither honest nor trustworthy, can reasonably argue that the nation is on the wrong track, their own good fortune notwithstanding.

Still, and despite these dissatisfactions, consumer confidence is rising, with expectations for the future and for job prospects leading the indicator up from levels reached during the October government shutdown. These confidence polls are not an infallible guide to consumer behavior, but better an upward movement than a downward plunge, especially when the improvement in confidence seems firmly rooted in economic reality.

That reality is this. The housing market, which last year contributed importantly to such growth as the economy managed, shows little sign of flagging. With average house prices still about 16 percent below the pre-bust high (the average conceals a wide range for different cities), we do not seem to be in bubble territory. Nor are we likely to enter that danger area now that mortgage rates have risen in response to the Fed’s decision to “taper”—reduce its $85 billion monthly bond-buying by some $10 billion, reversible if the economy falters. With the demand and supply of houses more nearly balanced, home builders are stepping up construction. Prices will continue to rise, although only half as rapidly as they did last year if experts prove right. It is not inconceivable that we will have a Goldilocks housing market this year. Not too hot (bidding wars will be fewer), nor too cold (so will foreclosures and sales of distressed properties).

It’s not that anyone here in Washington begrudges Britain, and to some extent Spain, their fledgling recoveries. But President Obama and other proponents of more government spending aren’t delighted that those nations’ austerity programs seem to be paying off in renewed growth rather than in the perpetual recession the Keynesian try-another-stimulus-crowd in the White House has been predicting. Conservatives are saying that the austerity sauce for the British roast beef would be just as tasty on the U.S. hot dog.

It’s policy that counts, not personalities.

At first, it was fun—this parlor game of guessing who the Obama administration will appoint as the next chairman of the Federal Reserve. We all assumed it would be Janet Yellen, because she’s a woman. And then suddenly we had Larry Summers all over the leading financial newspapers receiving multiple endorsements from respected economists. There were sly references to his intellectual prowess and invaluable experience, not to mention (but they always did) his connections with Obama’s closest advisers on economic and financial matters.

No, no, and no.

Yellen, vice chairman of the Federal Reserve and, evidently, a front-runner to replace Ben Bernanke as chairman in several months, “was one of the first members of the Federal Open Market Committee . . . to realize that the [housing market’s troubles] could cause a major recession.” (Alan Blinder, Wall Street Journal, July 29.)

Larry Summers, President Obama's director of the National Economic Council, on Monday said it was "ridiculous" for Republicans to point out the 7.9 percent unemployment rate announced last Friday was higher than when the president assumed office.

Today’s nomination of Dartmouth president Jim Yong Kim to be president of the World Bank was a narrow escape. There was a chance that President Obama might select a really qualified person: Lawrence Summers, who was often viewed as the lead candidate. But he was obviously unfit: He is a former secretary of the Treasury Department and an award-winning economist. Thus he was of course disqualified.

Despite the repeated attempts to wish away the Solyndra scandal, it appears to be getting bigger. Today, the Los Angeles Times informs us key White House personnel raised concerns the Department of Energy loan program that gave Solyndra $535 million was poorly conceived and managed long before the solar panel manufacturer's bankruptcy:

Larry Summers, the just-departed White House economic adviser, says today’s credit crunch has a new culprit. “In the early days of the crisis, there was clearly a problem with lenders being unable to lend even to creditworthy borrowers,” he says in an interview in The International Economy magazine. But no more.

Summers and Geithner leaving?

At Monday's town hall in Washington, President Obama was asked whether his top economic adviser, Larry Summers, and his Treasury secretary, Tim Geithner, would be staying through the end of this term. Obama's answer makes one think the answer is no:

Is Nancy Pelosi insulted?

In a press conference late last week, Speaker Nancy Pelosi addressed legislation before the House to extend unemployment benefits until November 30. Asked if the extension would serve as a "disincentive for people to look for work," Pelosi dismissed the argument as a “misrepresentation of the motivation for people to be on unemployment insurance” and an “insult to the working people of our country.”

First a Coaster, then a falconer/central banker.

Ever since I read George Plimpton’s Paper Lion in high school, I’ve been a huge fan of “stunt journalism.” This is the type of feisty reportage where a writer tries out for a professional football team, or takes a crack at conducting a symphony orchestra, and then writes a lighthearted article about his experiences.

On March 5, we might find that jobs were lost and the unemployment rate rose in February. But that will be because of the continued uncertain direction of economic policy—including the possibility of tax increases, high deficits, environmental regulation, and expensive healthcare reform—and not because of the weather.

Whatever the February report shows, though, there is also some good economic news.

And criticism of the president's budget mounts.

How serious a document is the president's budget proposal? The establishment media do not seem to like it. The budget's long-term projections are enough to drive you to drink. No political faction is satisfied with the administration's proposals. Liberals do not like the freeze on their favorite part of the budget; conservatives do not like the budget's tax hikes and massive deficits. Even the White House has reason to be disappointed. According to its own budget, unemployment will be at 7.9 percent when Obama stands for reelection in 2012. Only a huge, unanticipated economic boom will produce enough tax revenues to delay the fiscal reckoning and improve Obama's political standing.